Is One Stop Systems (NASDAQ:OSS) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that One Stop Systems, Inc. (NASDAQ:OSS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for One Stop Systems

What Is One Stop Systems's Debt?

The image below, which you can click on for greater detail, shows that One Stop Systems had debt of US$3.01m at the end of June 2023, a reduction from US$3.66m over a year. But it also has US$15.4m in cash to offset that, meaning it has US$12.4m net cash.

A Look At One Stop Systems' Liabilities

According to the last reported balance sheet, One Stop Systems had liabilities of US$11.4m due within 12 months, and liabilities of US$285.6k due beyond 12 months. Offsetting this, it had US$15.4m in cash and US$9.23m in receivables that were due within 12 months. So it can boast US$13.0m more liquid assets than total liabilities.

This luscious liquidity implies that One Stop Systems' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that One Stop Systems has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine One Stop Systems's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year One Stop Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 2.8%, to US$71m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is One Stop Systems?

Although One Stop Systems had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$1.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for One Stop Systems you should be aware of, and 1 of them is significant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.